Movie Economics

Having just seen and enjoyed Bernie, “a low-budget ‘labor of love'” with Jack Black and Shirley MacLaine, I started thinking about the economics of the movie business.

It is tough to predict whether a movie will be a success. Everyone said that Gone With The Wind would be a flop. After he finished filming Jaws, Steven Spielberg was sure it would lead to his demise. As for Titanic, it was called a “financial black hole” before it grossed record box office numbers.

At the Nantucket Film Festival last June, writer and director Nancy Meyers–Father of the Bride, Something’s Gotta Give, It’s Complicated–explained that it was tough to sell a new film to a studio because committees make the decisions using formulaic criteria. Years ago, instead it was more about the intuition of a studio boss who just said “Yes” or “No.”

The formulas, though, do not necessarily work. Thinking they had it figured out, Hollywood made Mutiny on the Bounty, Cleopatra, The Greatest Story Ever Told and The Bible. Instead, according to New Yorker writer Louis Menaud, the studios “lost their shirts.” On the other hand, Star Wars was rejected by Universal Studios and United Artists and George Lucas was given, for free, the sequel rights from 20th Century Fox.

Economists tell us that the movie industry is characterized by many small “events” and a few that are large, powerful and extraordinary. As a result, for the large movie makers, the unpredictability of the blockbuster affects their costs, revenues and returns. It shapes how they compete in a market structure called oligopoly because several large firms are dominant. (The “big six” are Paramount, Warner Bros., Columbia Pictures, Walt Disney/Touchstone, Universal, 20th Century Fox.)

And this takes me back to Bernie.Successful at the box office, perhaps Bernie is a perfect example of the unpredictability of the industrymodel.

Sources: You can read more about how movies make money in a recent NY Times Magazine article that also explains the money to be made from the afterlife of movies through overseas rights, video games, on demand. The NY Times article includes a fun “flow chart for making blockbusters.” The Louis Menaud New Yorkerarticle has more history while this paper from Arthur DeVany is more academic. I found out about Bernie’s box office and background here and my quote is from here.

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Elaine Schwartz has spent her career sharing the interesting side of economics. At the Kent Place School in Summit, NJ, she has been honored through an Endowed Chair in Economics and the History Department chairmanship. At the same time, she developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 ½ (Avon Books/Harper Collins). Elaine has also written in the Encyclopedia of New Jersey (Rutgers University Press) and was a featured teacher in the Annenberg/CPB video project “The Economics Classroom.” Beyond the classroom, she has presented Econ 101 ½ talks and led
workshops for the Foundation for Teaching Economics, the National Council on Economic Education and for the Concord Coalition.